When do investors choose risky options: private vs. public equity? A laboratory experiment.

J. Horowitz (BSU), J.P. Rabanal (Monash U), O. Rud (RMIT University), M. Sharifova (U.Pacific)

Outline

  • motivation

  • research question

  • design

  • preliminary

different reasons why people do not hold stocks

  • risk aversion

  • loss aversion

  • transactions costs, etc.

do these reasons apply to private equity?

  • different information structure

  • returns unobservable when out

design

  • stock return at time \(t\) is \(x_t\)

  • \(x\) follows autoregressive process

  • bond yields a payout \(c\)

design - public equity

design - private equity

  • \(x\) is still displayed when OUT

predictions

  • subjects prefer to explore

  • better information leads to participation

predictions

  • forecasting rules of \(x_{t+1} = \rho x_t + \epsilon_{t+1}\)

  • Landier, Ma and Thesmar wp, 2018
  • extrapolative expectations
  • sticky expectations \[ F_{t} x_{t+1} = (1-\lambda)\sum^2_{k=0}\lambda^k E_{t-k} x_{t+1}+\gamma \sum^2_{k=0}\lambda^k (x_{t-k}-E_{t-k-1}x_{t-k}) \]

predictions (bayes)

  • players observe \(y=x+e\)

  • similar to Kalman Filter.

An example (bayes)

results

results

results

results

conclusion

  • exploration effects overcome risk and loss aversion.

  • financing matters for people participation

work in progress

  • rely on forecasting rules

  • swithcing in/out is a form of stop-loss orders.

  • this is proven to be suboptimal.

  • build porftfolios with mixed shares.